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Binks v., Inc., C.A. No. 2823-VCN (Del. Ch. Apr. 29, 2010) (Vice Chancellor Noble)

April 29, 2010

The Court of Chancery granted a motion to dismiss all claims brought against, Inc. (“DSL”), and various individuals and entities who had corporate dealings with DSL, by a self-represented former stockholder of DSL who challenged a financing transaction between DSL and MegaPath, Inc. (“MegaPath”). The Court held that the plaintiff, Charles M. Binks, failed to allege facts sufficient to support his many claims, which included allegations that the directors of DSL breached Revlon duties in connection with the financing transaction. The Court noted that Binks did not have standing to bring many of his claims because they were purely derivative. The Court denied Binks’s request for leave to further amend his complaint. DSL entered into the financing transaction with MegaPath when DSL’s financial advisor, after a six-month exploration of options, informed DSL that the financing transaction was the only alternative to bankruptcy. Pursuant to the financing transaction, in exchange for a loan, DSL issued notes to MegaPath that would represent more than 90% of DSL’s shares if fully converted. Six months after completing the financing transaction, MegaPath exercised its conversion rights and effected a short-form merger.

Binks contended that the defendant DSL directors breached fiduciary duties owed under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) because they failed to obtain the best price reasonably available when they approved the financing transaction, which he argued was a change in control transaction. Despite the six-month delay between the financing transaction and the short-form merger, and despite the holding in Glassman v. Unocal Exploration Corp., 777 A.2d 242 (Del. 2001) that appraisal is the exclusive remedy available to a minority stockholder who objects to a short-form merger, the Court assumed without deciding that Revlon applied. The Court was mindful of the fact that Binks represented himself and noted that a heightened standard of review would give Binks the most favorable analytical framework for the assessment of his claims. Moreover, the Court emphasized that treating the financing transaction and the short-form merger as one transaction arguably made Binks’s fiduciary claims direct and, therefore, they would not be derivative claims extinguished by the short-form merger.

The Court held that the board did not breach any Revlon obligations because it was independent and disinterested with respect to the financing transaction, was well informed by independent advisors of available alternatives, and acted in good faith especially in light of the scarcity of options available to DSL. Because the Court found no breaches of fiduciary duty, the Court also dismissed the claims that the non-DSL defendants aided and abetted the DSL board’s breaches of fiduciary duties.

The Court held that Binks failed to allege any facts to support his argument that MegaPath controlled the board of DSL before the financing transaction; therefore, the Court dismissed claims that MegaPath had breached fiduciary duties and engaged in corporate waste as a controlling stockholder of DSL. The Court also dismissed the corporate waste claim brought against the DSL directors because (i) the Court’s decision that such directors met their Revlon obligations precluded a claim for corporate waste on the same facts, and (ii) Binks did not have standing to bring this derivative claim because it was extinguished by the short-form merger.

Binks alleged that the DSL directors (i) grossly mismanaged DSL by abandoning and abdicating their responsibilities and (ii) breached the implied duty of good faith and fair dealing in connection with the payment of certain dividends in 2003 and 2004. The Court held that these claims were derivative and, therefore, the short-form merger extinguished them. The Court further found that these claims were barred by laches.

Binks argued that the DSL directors failed to disclose material information in a 2007 proxy statement with respect to the financing transaction and the short-form merger. The Court dismissed this claim because the proxy statement in question had been distributed in connection with a charter amendment, and not with the short-form merger, and because, even if the proxy statement had failed to disclose material information, the only available remedy, supplemental disclosure, was no longer relevant.

The Court held that it did not have personal jurisdiction over the CEO of MegaPath pursuant to 10 Del. C. § 3104(c)(4) because Binks failed to allege that the CEO personally engaged in any persistent course of conduct within the physical boundaries of Delaware.

The full opinion is available here